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Review of Aluminum Market in 2019 and Prospect in 2020

December 16, 2019

Abstract: entering 2019, the annual fluctuation range of Shanghai Aluminum narrowed again, after two waves of rise in April and August, the market fell back again, but the center of gravity shifted upward.

Entering 2019, the annual volatility of Shanghai Aluminum narrowed again, after two waves of gains in April and August, the market fell back again, but the center of gravity shifted upward. Aluminum prices hit rock bottom at the end of 2018, when batch shutdowns of electrolytic aluminum production capacity recovered slowly as prices rebounded. Coupled with macro-stimulus measures and lower cost alumina prices, the electrolytic aluminum industry has regained its vitality. Since then, natural and man-made disasters occurred again in August, and the rate of new production for the whole year has been slower than expected. From a cyclical point of view, the supply end of electrolytic aluminum has experienced a stage from loose to tight in 2019, and it will gradually move towards loosening under the eye of new production capacity in the future.

On the demand side, in the face of the macro background of economic adjustment, it is also as weak as expected. The back and forth of Sino-US trade; the basic failure of the "Golden Nine Silver Ten"; the constraints on aluminum exports everywhere; the decline in sales and new starts in the real estate industry; and the long-term downturn in the automobile industry. Without exception, all of these are weakening the consumption capacity of the downstream consumer end of electrolytic aluminum. In the next 2020, the demand side is still subject to the general situation, it is still difficult to have bright spots, but the author believes that it is the automobile industry that is expected to bring some benefits to consumption. Car production, which is already at rock bottom, is expected to enter the base stage after the completion of the depot phase. In addition, aluminum for consumer goods industry and aluminum for UHV will be the growth point for next year.

On the whole, aluminum ingot inventory, which has been in the de-inventory cycle, will also usher in a turning point from decline to rise in 2020. Without the interference of external policies, the torrent of the market will roll forward in the direction of persistent surplus. In the bottoming stage of economic development, the price of raw materials is difficult to be left alone, and it is bound to be weak with the general trend. Whether aluminum can rise first among all non-ferrous varieties depends on the time when the demand side rises. In this process, we expect to suppress the trend first and then rise later. In the first half of 2020, after the upstream alumina price is no longer a cost support, the capacity release of electrolytic aluminum will determine the future trend of aluminum price. Aluminum prices are expected to show a wide range of volatility next year, with the main range between 13300 and 14200.

The first part: the review of the market trend of primary aluminum in 2019.

Aluminum prices continue to fluctuate widely in 2019

Since the 1990s, aluminum prices have fluctuated in a more moderate manner and the price center of gravity has risen. It was only after 2005 that the volatility of aluminum prices increased. From 2005 to 2008, due to a series of effects brought by the high price of crude oil, the price of basic metals also rose. When the financial crisis hit in 2008, aluminum prices fell off a cliff along with other commodities. Since then, economic stimulus measures have gradually taken effect, and aluminum prices have begun to climb again. Looking back, the recovery and recession of the global economy are basically positively related to aluminum prices. With the complex and changeable global political and economic situation, the fluctuation of aluminum price has become more complex in recent years.

In the medium term, the trend of Shanghai Aluminum in the past 10 years can be divided into four parts: the price recovery period from the economic crisis in 2008 to 2011, during which prices rebounded all the way from the trough. Macroeconomic orientation is the main logic of this stage; the second stage is the four-year period from the end of 2011 to the end of 2015, during which aluminum prices fell all the way and reached a new low in nearly a decade, mainly due to the law of value of the mismatch between supply and demand. The influx of small and medium-sized smelting aluminum manufacturers with low barriers has become the main culprit for the continued decline in prices; the third stage is the price recovery period from 2016 to the present, when aluminum prices began to rebound under the influence of the law of the price cycle. Coupled with the supply-side reform to eliminate production capacity in the past two years, aluminum prices have ushered in a recovery period of rapid development, but the contradiction between supply and demand has further played a role with the rise of prices. The fourth stage is from the low in 2017. Aluminum prices have entered a period of wide volatility.

If Shanghai Aluminum is a wide-range shock market in 2018, then Shanghai Aluminum is a narrow-range fluctuation in 2019. The drive logic of disk operation has many similarities, but the amplitude of shock is further narrowed. At the beginning of 2019, the price of aluminum in Shanghai bottomed out. Due to capacity growth in 2018 and weak consumption combined with falling cost-end alumina prices, Shanghai Aluminum experienced a large wave of price decline, which ended with extensive losses in the industry and many companies actively and passively shut down some of their production capacity.

Then, with the decline in production after the price hit bottom, and the strength of macro-stimulus measures, aluminum prices began to show a concussive rebound. In addition, the release of new capacity originally expected to be put into production in 2019 was lower than expected, resulting in a downward trend in social inventory. Since the second quarter, cost end-oxidation prices have risen sharply, providing a strong support for aluminum prices. After that, after the aluminum processing downstream of the original aluminum entered the off-season, the price began to fall, and the alumina price at that time also returned to the downward channel. Coupled with the twists and turns in Sino-US trade relations, aluminum prices have fallen again.

Without the Typhoon Lekima that ravaged China's eastern coast in the third quarter and the aluminum plant accident in Xinjiang, the summer of 2019 would have been a quiet season. However, natural and man-made disasters have brought a very restless market this summer, and a sharp rise has become an inevitable trend of the market. In addition, the demand for the peak season in September and October, which was generally optimistic in the industry, has basically failed, and the market has once again returned to the days when everyone was bearish.

II. The trend of Lun Aluminum is fluctuating and downward in 2019.

Like Shanghai Aluminum, Roon Aluminum also maintained the market of shock finishing throughout the year in 2019, but since April, the trend of Lun Aluminum has basically deviated from Shanghai Aluminum, and this situation did not improve until May. Shanghai Aluminium's overall trend began to remain basically in the same direction, but continued to maintain a large price gap with Shanghai Aluminum, and so far there is no obvious sign of narrowing. This is closely related to the resumption of production of Hydro abroad and the shrinking demand around the world.

III. China's economic growth continues to be under pressure.

China's economy shows an overall downward trend in 2019. At present, China is in the medium-speed growth period at the end of high-speed growth, and the power shift period in which the growth rate weakens. Fast-growing industries account for a relatively low proportion of growth, slow growth and a large proportion of industries in adjustment, which is not enough to support the overall economic growth. In 2020, it will still be the vertical of L, looking for the horizontal of L. China has been looking for a medium-speed growth platform for almost 10 years, showing a new pattern of micro-differentiation (industry differentiation, regional differentiation) and the transformation of new and old power.

Taken together, real estate is the mother of the cycle. At present, real estate continues to be tightly controlled, industrial transformation and upgrading, and policies tend to stimulate domestic demand (but there is no loosening of real estate policies). If L can stand firm, it may last for 10 years or more (more than 5% of the medium-speed growth platform is considered high-speed), and international agencies generally expect between GDP5.7-6 next year. At present, China continues to play down the real estate policy, real estate investment continues to weaken, China's real estate has said goodbye to the period of rapid growth. The most obvious of these is the rise in the number of households, which is now close to 1.06 won 1.07, while the number in Japan and the United States reached 1.15 when the real estate market began to fall back. It can be seen that the increment of our country has reached its peak and is currently maintained by stock.

China's demographic trend formed three inflection points in 2010, 2015 and 2031, and the demographic dividend gradually weakened. The current situation is that China's middle-and low-end manufacturing industries are moving out, expanding domestic demand and transforming to high value-added industries. Judging from the trade frictions between China and the United States in recent years, the relative changes in the Sino-US economy began to benefit China. China's counter-cycle is not yet higher than the endogenous demand compared with the same period last year, which is the most restrained one. Trade frictions cannot change the course of the development of the US trade deficit. Now, the fastest period of China's economic downturn has passed, and 18 years of fears of stall are true. On the other hand, the US economy is just beginning to prepare for the downturn. 18 years is the time when the US economy hit a new high. From a global point of view, it shows the characteristics of high government debt, low interest rates and weak demand. The global economy has entered a bumpy period and trade frictions are frequent. The anchor of value is drifting, and the industry is also reshuffling (technology upgrading, block chain, artificial intelligence, etc.).

Macro indicators are expected to be better in 2020 than in 19 years: macro deleveraging is coming to an end; Sino-US trade negotiations may be better expected; next year will be the end of strategic planning, and economic growth will not be less than 6% next year, and may be less than 6% in the first quarter. So to achieve the goal of quadrupling, the stimulus is likely to be greater.

Part II Global primary aluminum supply is tight.

I. the output of bauxite is on the rise.

According to data from the World Bureau of Metals Statistics ((WBMS)), global bauxite production continued to grow in 2019, basically the same rate as in 2018. From a country-by-country point of view, the increase in Guinea is the most obvious among the main bauxite producing areas, followed by Australia, which also maintains a trend of growth. But production in China, Brazil and India has remained stable and there is little momentum for growth. In the future, with the further increase in global demand for bauxite, the possible increase will be in Guinea and Australia. In particular, although Guinea's absolute output is not the highest due to backward infrastructure, it has high mineral taste and low production cost. with the progress of technology, it is bound to bring a large number of high-grade and low-price bauxite resources to the market.

II. Global alumina production has increased

The supply of alumina in 2018 can be said to affect the nerves of the global aluminum market. After the decline in production and tight supply in 2017, it basically maintained a relatively stable situation in 2018, but the shortage expectations brought about by factors such as a partial shutdown strike were fermented several times. After entering 2019, with Hydro's full resumption of production, the global supply of alumina has increased sharply, and the price of alumina has plummeted. According to the International Aluminum Association, the average monthly output of alumina from 2019 to August was 11.35 million tons, an increase of 481000 tons over the average monthly production for the whole of 2018.

III. Emerging developing countries become the driving force for the growth of global primary aluminum consumption

On the whole, global primary aluminum consumption still shows a slight increase. The consumption of traditional primary aluminum consumption in large countries did not perform well in 2019, but the primary aluminum consumption of emerging developing countries became the bright spot of global consumption, such as India and Brazil. In WBMS's global aluminum supply and demand balance statistics, from 2016 to 2019, the overall global primary aluminum supply is still in a state of shortage, while China is in sharp contrast to it, overcapacity still exists for a long time.

The third part is the present situation and trend of primary aluminum supply end in China.

The industrial chain of primary aluminum is not long from the upstream, from the mining of bauxite to the smelting of alumina, and finally to the production of electrolytic aluminum. These three important links constitute the upstream industrial chain of primary aluminum. From the perspective of bauxite reserves, although China's bauxite reserves are not low, but the taste is not good, so it still depends on imports all the year round. In addition, the supply-side reform and the release of new production capacity have also had a great impact on the upstream industrial chain of primary aluminum.

I. Import of bauxite will continue to grow

According to the latest customs data, in September 2019, China imported a total of 6.7495 million tons of bauxite, a decrease of 21.86 percent from the previous month, and a decrease of 2.08 percent from the previous month. From January to September, China imported a total of 78.1325 million tons of bauxite, an increase of 26.79 percent over the same period last year.

By country, the countries that imported bauxite into China in September were Australia, Guinea and Indonesia, and the month-on-month decline in September was mainly reflected in the reduction in Guinea. Imports from Australia in September were 3.3329 million tons, up 2.93 percent from the previous month, up 7.15 percent from the same period last year; imports from Guinea were 1.7864 million tons, down 50.89 percent from the previous month and 25.30 percent from the same period last year; and imports from Indonesia were 1.212 million tons, up 6.93 percent from the previous month and 54.32 percent from the same period last year. Imports from Brazil 287600 tons, Solomon 102200 tons, Jamaica 28300 tons, Guyana 100 tons.

Among them, there is a significant month-on-month decrease in imports from Guinea, mainly due to two reasons. First, Guinea began to enter the rainy season in July, and the decline in ore mining suppressed exports. Compared with the data of the past three years, Guinean bauxite imports began to decline in July and resumed growth in November; second, the strike of workers in local mining enterprises in Guinea has slowed down the mining efficiency of enterprises to some extent, but the impact is relatively limited, and the problem of strike has been resolved.

Judging from the situation for the whole year, the import volume of bauxite is still showing an increase, although the data in August and September declined a lot from the previous month. However, with the growth of demand and the continuous expansion of domestic bauxite supply gap, bauxite will grow in the next four quarters and 2020. In addition, it is worth noting that the average import price of bauxite has been declining since the beginning of this year. In the future, with the continuous increase in production in Guinea and other major producing areas, the price of bauxite will continue to be weak, and the import volume will further increase at that time.

II. Alumina prices are expected to fluctuate weakly.

According to the latest data from the National Bureau of Statistics, national alumina production in September 2019 was 5.833 million tons, down 3.4% from a year earlier. Total output from January to September was 55.592 million tons, up 4.7% from a year earlier. According to the survey of Shanghai Nonferrous Network, in September, the output of metallurgical grade alumina was 5.398 million tons, and the average daily output of metallurgical grade was 180000 tons. The month-on-month increment in September mainly comes from Xing'an Chemical Industry, Shanxi Huaqing, Chinalco Zhongzhou, Inner Mongolia Mengxi and other enterprises; in terms of month-on-month reduction, it mainly comes from Sanmenxia Hope, SPIC Shanxi and other enterprises. Some enterprises failed to resume production as scheduled due to falling prices and National Day environmental protection restrictions, while some enterprises failed to resume full production due to domestic ore tension.

Since 2019, there have been new changes in the alumina industry, and the relatively tight supply began to enlarge gradually. With Hydro's resumption of production, the global supply of alumina began to ease gradually. Prior to the net export of China's alumina industry is also affected by its import window, gradually reduced foreign prices of alumina began to enter the domestic market share, so alumina prices are also in a state of continuous decline. In the next 2020, with the release of electrolytic aluminum production capacity, it is expected that there is still room for growth in alumina demand, but the decline of upstream cost-end ore prices also restricts the rising space of alumina prices. therefore, alumina prices are expected to show a low concussion trend in 2020.

III. The import of primary aluminum increases and the export of aluminum products decreases.

In 2018, as foreign aluminum prices continued to weaken, the internal and external price gap gradually narrowed and tended to zero, which also led to the gradual reduction of primary aluminum imports. However, in 2019, aluminum prices gradually evolved into a pattern of external weakness and internal strength, and the import window was opened again. Primary aluminum also began to continue the previous net import situation, in addition, the average import price has also narrowed.

In terms of export, the trade friction between China and the United States and the "double reverse" investigation of China's aluminum industry have a great impact on our aluminum export. According to the latest data from the General Administration of Customs, China's aluminum exports fell 0.9 per cent in October 2019 from a month earlier to a low since February, a year-on-year drop of 10.6 per cent. China exported 431000 tons of unwrought aluminium and aluminium products in October, which continued due to output disruptions at two large smelters in August. Exports from January to October totaled 4.801 million tons, an increase of 1.4 percent over the same period last year.

Throughout the year, the price gap between February and April continued to expand, and the amount of primary aluminum imported into China also continued to rise; in the third quarter, the price gap narrowed and other influencing factors were added, and aluminum exports began to decline sharply month-on-month. With the continuous grim situation of aluminum export trade, the prospect of aluminum export in 2020 is still not optimistic.

IV. The output of primary aluminum is expected to continue to increase.

According to the latest data, China's original aluminum (electrolytic aluminum) production in October 2019 was 2.88 million tons, down 1.8% from a year earlier. Total output from January to October was 29.24 million tons, up 0.7% from a year earlier. The annual output is expected to be 35.75 million tons, down 2% from the same period last year. Although the statistical output in 2018 is 36.49 million tons, down 0.08% from the same period last year, considering the error of data statistics, it is considered that 2019 will be the year of negative growth in the real sense of electrolytic aluminum in China. This negative growth began in the second half of this year, and primary aluminum production continued to struggle in a year-on-year contraction due to typhoons and accidents in August. Aluminum alloy production is in sharp contrast, has been rising since 2019, especially since the third quarter, alloy production has been at a high level. The production of primary aluminum has narrowed and the production of aluminum alloy has increased, which also confirms that the current destocking trend of primary aluminum is continuing.

According to the statistics of Baichuan Information, as of November 14, 2019, China's effective production capacity of electrolytic aluminum was 48.24 million tons, with a start-up rate of 35.625 million tons, with an operating rate of 73.85%. As of November 14, 2019, China's electrolytic aluminum production has been reduced by 2.778 million tons, and it has been determined that the output to be reduced is 10 million tons, or the production is reduced but the unspecified quantity is 10 million tons. As of November 14, 2019, the scale of electrolytic aluminum production in 2019 is 2.406 million tons, of which 863000 tons have been resumed and 1.373 million tons have been resumed. As of November 14, 2019, China's new production capacity of electrolytic aluminum has been completed and waiting to be put into production of 3.4655 million tons, has been put into production of 1.8455 million tons, and the new capacity is to be put into production of 1.62 million tons. Another 800000 tons are under construction and have the capacity to be put into production this year, and it is expected that another 620000 tons will be put into production this year, with a total of 2.4155 million tons expected.

Judging from the situation in 2019, the total production capacity of electrolytic aluminum has been increasing steadily after a large adjustment at the end of last year. The operating rate also continued to rise slightly after the seasonal factors of the Spring Festival passed. Judging from the latest data, the release of new production capacity of electrolytic aluminum has slowed down, and the resumption of replacement capacity that has previously been suspended has been repeatedly postponed, and there is little possibility of a surge in production this year, and the capacity pressure will be delayed until next year. It is expected that the pressure on the increase of electrolytic aluminum production capacity will further increase in 2020.

5. the speed of domestic destocking begins to slow down.

Since the beginning of this year, aluminum ingots have continued to go out of stock, and the decline in inventory has accelerated after the Spring Festival. Shanghai aluminum and social aluminum ingot inventory basically maintained the same trend, until the recent decline rate slowed down, but the destocking cycle continues. Lun aluminum inventory began the process of destocking again after a wave of gains began at the end of April, and suddenly increased its positions sharply in mid-November. At that time, the price also continued to weaken with the rise of Lun aluminum inventory, which opened a market that deviated from the domestic Shanghai aluminum market. Judging from the current situation, due to the structural changes in primary aluminum production, domestic aluminum ingots continue to show a downward trend in inventory, but in the second half of the year, due to the poor macro situation, the demand slows down, which greatly affects the rate of inventory decline. and may enter the accumulation stage at any time next year.

The fourth part is the consumption situation and forecast of primary aluminum in the lower reaches of our country.

I. the demand for aluminum in real estate should not be overly pessimistic.

According to the latest data from the National Bureau of Statistics, from January to October 2019, the sales area of commercial housing was 1.33251 billion square meters, the growth rate changed from negative to positive for the first time this year, and the year-on-year growth rate was 0.1% from January to September. Of this total, the sales area of residential buildings increased by 1.5%, the sales area of office buildings decreased by 11.9%, and the sales area of commercial housing decreased by 14.0%. Sales of commercial housing totaled 12.4417 trillion yuan, up 7.3 percent, or 0.2 percentage points faster. Of this total, residential sales increased by 10.8%, office sales decreased by 11.5%, and sales of commercial housing decreased by 13.4%.